BEST PRACTICES - The In-house Counsel Bar …€¢ Promote consistency and best practices ... • Bank accounts ... • Be honest with yourself about what you can do in-house

in Global Subsidiary Compliance

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BEST PRACTICES

Jennifer K. MailanderAssociate General Counsel

Corporation Service Company

Kate PytlewskiSenior CounselEPAM Internal

Increased Focus on Governance

• Scandal and financial disaster• WorldCom, Enron• Questions about board of director, auditor

effectiveness• Increased federal government involvement

in governance practices of public companies

• The rules, processes, and practices by which a company is directed and controlled.Critical for ensuring compliance by the corporation

• Governance involves the balancing of the interests of many stakeholders.Shareholders, management, customers, employees, suppliers, financiers, government, community

• Maintaining good governance and corporate separateness mitigates risks

• Ensures accuracy of reporting and recordkeeping• Governance reflects a company’s culture.

Good Governance

• Separate corporate personalities no longer exist due to a unity of interest and ownership between subsidiary and parent– “Total domination of the subservient corporation, to the extent that the

subservient corporation manifests no separate corporate interests of its own and functions solely to achieve the purposes of the dominant corporation.”Tip Systems LLC v SBC Operations, Inc. 536 F. Supp. 2d 745 (2008) (U.S. District Court for the Southern District of Texas)

• Fraud or an injustice results from respecting their corporate separateness– Fraud or injustice must be found in the defendant’s use of the

corporate form– Fraudulent intent behind the incorporation

− “Court can ignore technical differences between two corporations where the second corporation was created merely to avoid the effect of laws.”Mobil v. Linear Films, Inc., 718 F. Supp. 260 (1989) (U.S. District Court of Del.)

Piercing the Corporate Veil

• Educate, provide advice and counsel on all aspects of subsidiary governance (including affiliates and JVs)

• Partner with business units on company transactions• Prepare and file governance documents for

subsidiaries, affiliates and joint ventures• Assist foreign subsidiaries in the preparation of

governance documents• Maintain a central repository of governance

documents• Promote consistency and best practices

Areas of Responsibility for Good Subsidiary Management

Subsidiary Lifecycle*

Business Need

Planning

Documentation

Filing andRegistration

OrganizationalActivity

OngoingMaintenance

Exiting

BUSINESS NEED

• High Risk Activity• Joint Activity• Tax Justification• Separate Line of

Business• Local Requirements• Acquisitions

*Society of Corporate Secretaries and Governance Professionals

Subsidiary Lifecycle

Business Need

Planning

Documentation


Organizational Activity

OngoingMaintenance

Exiting

PLANNING

• Jurisdiction• Type of Entity• Tax Implications• Directors and Officers• Governance• Reservation of Name• Capitalization

Requirements

Subsidiary LifecycleBusiness Need

Planning

Documentation



OngoingMaintenance

Exiting

DOCUMENTATION

• Charter Documents• Bylaws or Agreement• Misc. Registration Forms• Resolutions or Actions• Database

• Corporation: Articles & Bylaws−Location of offices−Rules governing shareholder & director meetings−Number, election, removal of directors/creation of

committees−Titles and duties of officers

• LLC: Operating/LLC Agreement−Style of management (member managed/manager managed),

meetings, new members, indemnification−Number, election, removal, resignation, vacancy, powers and

authority of managers−Officer titles and appointment/removal−Fiduciary duties (can be waived in Delaware)

• Partnership: Partnership Agreement

Formation: Governing Documents

• Each jurisdiction has its own requirements, which may be very different from the U.S.

− May need to file annual accounts and report changes in legal representatives, directors, shareholders, auditors and to the regulating authority

− May have limited authority (e.g., branches and representative offices)− In most non-U.S. countries, directors have authority to sign

documents on behalf of the company (very different from U.S.)− May have governmental filings associated with increasing

capitalization and these increase may be triggered automatically by sending employees into certain jurisdictions to perform duties

• Potentially serious consequences for missing filing deadlines− Directors may receive notices at their home addresses− Directors may be detained by the authorities− Directors may be subject to personal liability and sanctions

• Consider having your service provider perform an annual audit to confirm that all legal requirements have been satisfied

Non-U.S. Entities


Business Need

Planning

Documentation



OngoingMaintenance

Exiting

FILING AND REGISTRATION

• Domiciliary State• “Foreign” States• “Overseas” Jurisdictions• SS-4 EIN• State and Local Taxes


Business Need

Planning

Documentation



OngoingMaintenance

Exiting ORGANIZATIONAL ACTIVITES

• Meeting• Adoption of Bylaws or

Ratification of Agreement

• Banking Resolutions• Delegation of Authority• Intercompany

Agreements


Business Need

Planning

Documentation



OngoingMaintenance

Exiting

ONGOING MAINTENANCE

• Periodic Meeting or Consents

• Annual Meetings or Action of Shareholders or Parent and of Subsidiary

• Renewal with State Agencies

• Annual Compliance-domestic and foreign

• Capital contributions & dividends

Subsidiary LifecycleBusiness Need

Planning

Documentation



OngoingMaintenance

Exiting

EXITING

• Proper Planning• Dissolution vs.

Merger• Documentation• Withdrawal• Filing Tax Returns• DBAs

• Joint ventures present many challenges for the corporate secretary’s office• Who maintains corporate records?• Who serves as corporate secretary?• What is the composition of the board?• Who has signature authority for the JV?

• Joint venture agreement should detail how these governance issues will be handled

• Directors and officers of joint ventures need to fully understand their duties and responsibilities – significant risks of conflicts of interest

Unique Challenges with Joint Ventures

• Types of data managed• Legal entity information• Jurisdictional qualifications• Stock/Capital & ownership information• Officer, Director, Management records• Registered offices• Auditor information• Bank accounts• Minute books• Organizational charts• Information unique to your company

Global Subsidiary Data

• Single repository for key company & governance information

• Security & Privacy• Disaster recovery for your data & documents• Controlled accessibility • Audit trail

• Communication & collaboration• Document management• Compliance Calendar

• Alerts & notifications

• Reporting

Global Subsidiary Management Technology

TOP TEN TIPS FORSUBSIDIARY COMPLIANCE

10. Ensure You Have Necessary Resources

• Can be difficult in the current economic environment

• Utilize other departments if possible

• Document costs and expenditures, and look at ways that you can reduce them without adversely affecting your effectiveness

• Be honest about what you can deliver and the risks

9. Take Advantage of Technology

• Use and maintain a database that is appropriate for your company size and the number of subsidiaries• For some, an Excel spreadsheet is adequate while others need a

more sophisticated package

• Utilize your registered agent’s website for ordering good standing certificates, forms, etc.

• Utilize other online resources (e.g., Secretary of State websites, Society of Corporate Secretaries & Governance Professionals websites)

8. Keep Your Information Current

• It is critical that your subsidiary information be kept current

• Carefully consider what information you want to track in your database and the level of access to give to persons outside the corporate secretary’s office

• Authorize only a few people to update your database and don’t update without first obtaining the signed written consents or minutes

• Develop a system to audit and update your information

7. Know and Review Your Service Providers

• Maintain a database of service providers – this is particularly important for non-U.S. entities where you will need assistance from service providers for most in-country activities

• Be honest with yourself about what you can do in-house and what needs to be handled by outside counsel (e.g., tax filings, etc.)

• Look for cost savings through consolidation of service providers

6. Train Your Subsidiary Directors and Officers

• Provide subsidiary directors and officers with training regarding their duties and responsibilities

• Survey your subsidiary directors and officers on an annual basis to ask:• Are your entities correct?• Are your appointments correct?• Do you accept and understand your corporate governance

responsibilities for your roles?

5. Protect the Corporate Veil!

• Important to maintain corporate separateness – keep in mind when appointing overlapping subsidiary directors and officers

• Remember to hold annual meetings and obtain requisite approvals from the subsidiary’s board of directors and/or shareholders

• Document all intercompany transactions (e.g., intercompany loans, intercompany sales or service agreements)

4. Be Aware of Differences Between Jurisdictions

• Don’t assume that every state is the same as Delaware –When in doubt, read the statute

• Non-U.S. subsidiaries are a trap for the unwary. You need local advice and assistance in complying with local law

3. Periodically Review Your Corporate Structure

• Review dormant entities to determine if they can be eliminated (either through dissolution or liquidation)

• Keep up to date on changes in law that may affect your structure (e.g., changes in tax treaties that may affect offshore holding company structures)

• Be sure that management understands the costs associated with adding new entities to your corporate structure

2. Create Strong Internal Processes

• Develop standard policies, practices and procedures for subsidiary governance

• Develop process to make sure that all constituencies (Legal, Tax, Treasury, Accounting, Operations) are aware of and have signed off on actions to be taken

• Do not backdate documents (e.g., minutes, written consents, powers of attorneys)

• Calendar due dates for annual meetings, annual report filings, etc.

1. Network Within and Outside Your Organization

• Use your contacts in other parts of the organization (e.g., Human Resources) to help you keep up to date on developments affecting your subsidiaries

• Develop a core team of company contacts to assist on subsidiary management issues

• Increase awareness through a corporate secretary’s page on your intranet site, with links to important information

• Talk to your peers outside the company regarding best practices and to stay abreast of new developments

QUESTIONS?

Thank you!

Jennifer K. MailanderAssociate General Counsel

Corporation Service [email protected]

Kate PytlewskiSenior CounselEPAM Internal

[email protected]